TEAM, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 19, 2019. The filing also reports fourth-quarter results. Team provides industrial inspection, heat treating, mechanical repair and integrity-management services through IHT, Mechanical Services (MS) and Quest Integrity.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,246.9 million | $1,200.2 million |
| Gross margin | $328.3 million (26.3%) | $310.0 million (25.8%) |
| Operating loss | $39.0 million | $115.1 million |
| Net loss | $63.1 million | $84.5 million |
| Operating cash flow | $41.9 million | $(13.7) million |
| Capital expenditures | $27.2 million | $36.8 million |
- Revenue rose 3.9% year over year. By segment, IHT revenue increased 4.9% to $617.4 million, MS increased 0.5% to $532.4 million, and Quest Integrity increased 18.8% to $97.2 million.
- FY 2018 operating loss included $33.9 million of expenses management classified as not indicative of core operations; FY 2017 included $107.7 million, including $75.2 million of goodwill impairment. Excluding these identified items in both years, operating loss improved by $2.3 million, according to management.
- Net interest expense increased to $30.9 million from $21.5 million. The company also recorded a $24.8 million loss on the convertible-note embedded derivative in 2018.
- At year-end, cash was $18.3 million and working capital was $215.0 million. Management reported approximately $66 million of available Credit Facility capacity.
- Debt principal outstanding was $156.8 million under the Credit Facility and $230.0 million of 5.00% convertible notes due 2023. The balance-sheet carrying amount of long-term debt and capital leases was $356.8 million, excluding $0.6 million current maturities.
Changes and quarterly results
- FY 2018 revenue improved, chiefly from higher demand in IHT and Quest Integrity. MS benefited in the first half, but a softer fall turnaround season offset much of that progress as customers postponed maintenance amid high refinery utilization.
- Fourth-quarter revenue was $309.8 million, versus $316.3 million in Q4 2017. Q4 2018 operating loss was $6.9 million, compared with a $2.2 million operating loss in Q4 2017. Q4 net income was $4.0 million, versus $19.7 million; the 2017 quarter included tax-related revisions.
- ASC 606 adoption reduced reported 2018 revenue by $4.8 million and increased net loss by $4.3 million. The filing states that the overall pattern or timing of revenue recognition did not change significantly.
- The 2018 net loss was lower than in 2017, while cash from operations improved to positive $41.9 million. Cash declined to $18.3 million from $26.6 million at year-end 2017.
Outlook, risks and unusual items
- Management expected the OneTEAM restructuring to be largely completed in the first half of 2019. It reported about $10.1 million of savings realized in 2018, projected $35–$45 million of annual cost efficiencies by 2020, and estimated total program expenses would not exceed $30 million. Benefits are not assured.
- The Credit Facility matures July 7, 2020. Management said it was evaluating renewal, replacement or other financing options, with plans to complete its evaluation and execute a chosen approach in 2019; it cautioned financing may not be available on acceptable terms.
- At December 31, 2018, the company was in compliance with its covenants: senior secured leverage ratio was 2.56:1 against a 3.50:1 maximum, and interest coverage was 2.90:1 against a 2.25:1 minimum. Required thresholds tighten in later 2019 quarters. A 100-basis-point rise in market rates was estimated to increase annual interest expense by about $2 million.
- Other key risks include dependence on refining and petrochemical activity, seasonality and turnaround timing, labor and safety exposure, competitive pricing, customer contract termination, foreign exchange, litigation and potential future asset impairment. General liability insurance carries a $3.0 million self-insured retention per occurrence.
- The company reported a material weakness in tax valuation-allowance controls relating to 2017, which it said was remediated before December 31, 2018. Prior-period tax figures were revised, increasing 2017 tax benefit and reducing the reported net loss by $19.7 million; the company concluded the errors were not material to previously filed statements. Auditors gave unqualified opinions on the financial statements and internal control.
- No cash dividends were paid in 2018 or 2017. The Credit Facility restricts dividends.
Important facts for investors to verify
- Progress on Credit Facility refinancing or renewal before the July 2020 maturity, covenant headroom, and usable borrowing capacity after letters of credit.
- Whether OneTEAM achieves the projected savings and whether implementation costs remain within management’s estimate.
- Whether operating cash flow remains sufficient to fund debt service, capital spending and working-capital needs.
- Trends in receivables and credit losses: the allowance for doubtful accounts rose to $15.2 million from $11.3 million, and 2018 bad-debt provision was $11.7 million.
- Whether delayed maintenance work returns and whether labor, materials, freight and fuel cost increases pressure margins.
- Potential dilution and settlement funding for the $230 million convertible notes, initially convertible into approximately 10.6 million shares.